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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended   June 30, 2000

OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number   1-4797

ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)   (847) 724-7500

Former address: _______________________________________________________________
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  X     No      

The number of shares of registrant’s common stock, $.01 par value, outstanding at July 31, 2000:   301,835,426.

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ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

(In Thousands Except for
Per Share Amounts)

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ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

(In Thousands)

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ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

(In Thousands)

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ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

(1) INVENTORIES at June 30, 2000 and December 31, 1999 were as follows:

(In Thousands)

(2) COMPREHENSIVE INCOME:

The components of comprehensive income were as follows:

(3) SHORT-TERM DEBT:

In June 1999, the Company entered into a $400,000,000 Line of Credit Agreement. In 2000, the Company extended the termination date of the Line of Credit from June 28, 2000 to June 22, 2001.

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Item 2 — Management’s Discussion and Analysis

ENGINEERED PRODUCTS — NORTH AMERICA

Businesses in this segment are located in North America and manufacture short lead-time components and fasteners, and specialty products such as adhesives, resealable packaging and electronic component packaging.

(Dollars in Thousands)

Operating revenues in 2000 increased 11% in the second quarter and 13% year-to-date compared with the prior year, principally due to base business revenue growth of 7% and 9% in the respective periods. For both periods, the biggest contributors to the base business growth were the construction (including the Wilsonart laminate operation), automotive and industrial plastics businesses. Acquisitions also contributed 4% to the revenue increase for the second quarter and 5% for the year-to-date period. Operating income increased 12% for the second quarter and 15% year-to-date, principally due to the base business revenue increases. Margins improved modestly for both periods as operating efficiencies at the base businesses were partially offset by the lower margins of acquired businesses.

ENGINEERED PRODUCTS — INTERNATIONAL

Businesses in this segment are located outside North America and manufacture short lead-time components and fasteners, and specialty products such as electronic component packaging and adhesives.

(Dollars in Thousands)

In 2000, revenues increased 11% for the second quarter and 16% year-to-date mainly due to acquisitions, which contributed 15% and 18% to the increase for the respective periods. The base business revenue growth was 6% for the three-month period and 7% for the six-month period, principally related to the automotive, construction, industrial plastics and electronic packaging businesses. The revenue increases were partially offset by the effect of foreign currency fluctuations, which decreased revenues by 10% for the second quarter and 9% year-to-date. The operating income increase of 57% for the second quarter and 50% for the first half of 2000 was primarily due to the revenue growth and cost reductions in the base businesses. Operating income was reduced 15% for the three-month period and 14% for the six-month period as a result of foreign currency fluctuations, primarily related to the Euro.

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Margins increased dramatically for both periods due to cost reductions and 1999 nonrecurring costs.

SPECIALTY SYSTEMS -NORTH AMERICA

Businesses in this segment are located in North America and produce longer lead-time machinery and related consumables, and specialty equipment for applications such as food service and industrial spray coating.

(Dollars in Thousands)

In 2000, revenues increased 6% and 9% for the three-month and six-month periods, respectively. The base businesses had revenue increases of 3% for the second quarter and 6% for the year-to-date period, primarily as a result of contributions from industrial packaging, food equipment and welding. Acquisitions added 3% to the revenue growth for both periods. Operating income increased 10% for the second quarter and 12% for the second half of 2000 and margins improved in both periods due to the revenue growth and improved productivity in the food equipment and welding businesses.

SPECIALTY SYSTEMS — INTERNATIONAL

Businesses in this segment are located outside North America and manufacture longer lead-time machinery and related consumables, and specialty equipment for food service and industrial spray coating.

(Dollars in Thousands)

In 2000, operating revenues increased 17% for the second quarter and 11% year-to-date primarily due to acquisitions, which contributed 27% and 17%, respectively, to the increase. Base business revenue growth was essentially flat for both periods. Foreign currently fluctuations, primarily related to the Euro, reduced revenues by 8% for the second quarter and 7% for the first half of 2000. Operating income increased 36% for the three-month period and 50% for the six-month period, principally due to acquisitions and productivity enhancement programs in the industrial packaging, finishing and food equipment businesses. Foreign currency fluctuations reduced operating income 11% for the second quarter and 13% year-to-date. Margins increased due to the productivity improvements in the base businesses.

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CONSUMER PRODUCTS

Businesses in this segment are located primarily in North America and manufacture household products which are used by consumers, including small electric appliances, physical fitness equipment and ceramic tile.

(Dollars in Thousands)

Operating revenues decreased 5% in the second quarter and 3% year-to-date as a result of lower sales for the small appliance and ceramic tile businesses, partially offset by higher sales of fitness equipment. Operating income and margins declined due to the lower sales volume and nonrecurring costs.

LEASING AND INVESTMENTS

This segment makes opportunistic investments in mortgage-related assets, leveraged and direct financing leases of equipment, properties and property developments, and affordable housing investments.

(Dollars in Thousands)

For both periods of 2000, operating revenues and income decreased due to higher gains on the sales of assets in 1999.

OPERATING REVENUES

The reconciliation of segment operating revenues to total company operating revenues is as follows:

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OPERATING EXPENSES

Cost of revenues as a percentage of revenues decreased to 64.7% in the first six months of 2000 versus 64.8% in the first six months of 1999. Selling, administrative, and research and development expenses decreased to 18.3% of revenues in the first half of 2000 versus 18.9% in 1999, primarily due to expense reductions as a result of a Company-wide objective to reduce administrative costs.

INTEREST EXPENSE

Interest expense increased to $33.8 million in the first six months of 2000 from $32.1 million in 1999, primarily due to higher average long-term debt in the period.

OTHER INCOME (EXPENSE)

Other income (expense) was an expense of $1.6 million for the first half of 2000 versus income of $11.1 million in 1999. This decrease is primarily due to losses versus gains on the sale of fixed assets, higher minority interest expense on less-than-100%-owned subsidiaries, and higher losses on foreign currency translation in 2000.

NET INCOME

Net income of $492.4 million ($1.62 per diluted share) in the first six months of 2000 was 15% higher than the 1999 net income of $428.1 million ($1.41 per diluted share).

FOREIGN CURRENCY

The strengthening of the U.S. dollar against foreign currencies in 2000 decreased operating revenues for the first half of 2000 by approximately $111 million and reduced earnings by approximately 3 cents per diluted share.

FINANCIAL POSITION

Net working capital at June 30, 2000 and December 31, 1999 is summarized as follows:

(Dollars in Thousands)

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During the second quarter of 2000, the Company increased short-term borrowings to fund acquisitions. This increase was offset by the retirement of the 5.875% bonds in the first quarter.

Accrued liabilities decreased primarily as a result of foreign currency translation and a decrease in accrued compensation and other miscellaneous accruals such as rebates and warranty.

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks, uncertainties, and other factors which could cause actual results to differ materially from those anticipated, including, without limitation, the risks described herein. Important factors that may influence future results include (1) a downturn in the construction, food service, automotive, general industrial or real estate markets, (2) deterioration in global and domestic business and economic conditions, particularly in North America, Europe, and Australia, (3) an interruption in, or reduction in, introducing new products into the Company’s product line, and (4) an unfavorable environment for making acquisitions, domestic and foreign, including adverse accounting or regulatory requirements and market value of candidates.

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Part II — Other Information

Item 4 — Submission of Matters to a Vote of Security Holders

The Company’s Annual Meeting of Stockholders was held on May 12, 2000. The following members were elected to the Company’s Board of Directors to hold office for the ensuing year:

Item 6 — Exhibits and Reports on Form 8-K

(a) Exhibit Index

(b) Reports on Form 8-K

No reports on Form 8-K have been filed during the quarter for which this report is filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ILLINOIS TOOL WORKS INC.